Editorial Note:The ICO Listing Online Editorial Team maintained a neutral perspective while crafting this content. While we may earn commissions from sponsored inclusions, this does not influence our evaluations of the topic.
Investing in a new crypto ICO can sometimes feel like walking through a minefield. The potential reward on the other side of the field is huge, but there are hidden dangers everywhere you look. If you take one wrong step, you could lose everything.
To get across a minefield safely, you need a special map that shows you where all the mines are buried. This guide is going to be that map for you. It will provide a clear and honest look at the most dangerous problems in the world of crypto fundraising. We will break down the top 5 Risks Associated with Crypto ICOs so you can learn to navigate this exciting but dangerous territory with more confidence.
Risk #1: The Scam Risk
This is the most well-known and the most malicious type of risk. These are projects that are created by bad people with the specific goal of stealing your money.
The “Rug Pull” or Exit Scam
This is the most common type of scam in the crypto world. A fake team will create a very professional-looking website. They will also create a lot of fake hype on social media to trick people.
After they raise a lot of money from hopeful investors during the ICO, they simply disappear. They take all the money and then delete their website and all of their social media accounts. This leaves all the investors holding tokens that are completely worthless.
Phishing and Fake Websites
Even if the project you are interested in is real, scammers will often create fake “copycat” websites. These fake sites look exactly like the real ICO page. They will try to trick you into sending your money to their own wallet instead of the real project’s wallet.
Risk #2: The Project Risk
It is important to know that not every project that fails is a scam. Many teams are honest and have very good intentions. But, they still fail for normal business reasons. The end result for your investment is the same: it goes to zero.
Team Incompetence or Inexperience
A great idea is nothing without a great team to build it. The project’s team might be very honest people, but they might not have the right business skills or technical expertise. They may lack the experience that is needed to run a successful company.
A Bad Idea
Sometimes, a project is built to solve a problem that doesn’t actually exist. If no one wants or needs the product that they are building, the project will eventually fail. When it fails, its token will become worthless. This is another one of the major Risks Associated with Crypto ICOs.
Risk #3: The Technical Risk
This next category of risk covers the dangers that are hidden inside the project’s technology itself.
Smart Contract Bugs and Hacks
A project’s smart contract is the computer code that handles all of the money. If this code has a bug or a security hole in it, a skilled hacker can find it. The hacker can then exploit this bug to steal all of the funds from the project.
A Lack of a Professional Security Audit
A security audit is when a professional company checks the project’s code for these bugs. A project that has not paid for a high-quality audit is taking a massive and unnecessary risk with its investors’ money. This is a huge red flag for any investor.
Risk #4: The Market Risk
Even if the project is legitimate and the technology is secure, you can still lose money. This is because of market forces that are outside of the project’s control.
Extreme Price Volatility
The price of a brand new token is incredibly volatile. This means it can go up and down very quickly. It can go up by 500% in one day and then crash by 80% the very next day. You must be prepared for these wild price swings.
Post-Launch “Dumps” by Early Insiders
Often, there are private investors who were able to buy the tokens even cheaper than you did in the ICO. They might “dump,” or sell, all of their tokens on the market as soon as it launches to take a quick profit. This can crash the price for all the ICO investors.
The Overall Crypto Market Cycle
No project exists in a bubble. If the entire crypto market is in a “bear market,” which is when all prices are falling, it is very difficult for a new project to succeed.
The history of past Initial Coin Offerings (ICOs) shows us that new projects launch much more successfully during a “bull market,” when prices are rising.
How to Manage and Mitigate These Risks
Now that you know where the “mines” are buried, let’s talk about the safety gear you can use to protect yourself.
1. Start Your Search on a Safer Platform
The first and most important step is to avoid the most dangerous areas. You should not start your search for new projects on social media. Instead, you should use a trusted platform that lists new crypto presales.
These websites act as a first-level filter. They help you to avoid the most obvious scams and will provide you with the official, verified links to a project’s website.
2. Become a Master of Research (DYOR)
The best protection that you have is your own brain. You must do your own research on every project before you invest.
Your research should focus on the key risks we have talked about. Is the team public? Is the idea a good one? Is the code audited? And is the token distribution fair?
3. Understand the Market Context
Before you invest, you should always try to get a feel for the overall mood of the market. You can do this by checking the current crypto market trends. This will help you understand if it is a good or a bad time to be taking on high-risk investments.
4. Follow the Golden Rule
Never invest more money than you are willing to lose completely. This is the most important rule of all. It is your ultimate financial safety net.
Let’s do a quick recap. The world of crypto ICOs is filled with many different kinds of risks. There are scams, project failures, technical bugs, and market volatility.
However, by knowing what these dangers are, you can take steps to protect yourself. By using a safe discovery platform, doing your own deep research, and following smart investment rules, you can dramatically reduce your risk.
Understanding the Risks Associated with Crypto ICOs is the most important skill you can learn on your journey to becoming a successful investor. If you ever need help analyzing a project’s risk profile, it’s always a good idea to get in touch with an expert team for a deeper look.
